* Draft sets out elements of new “fiscal compact”
* Germany immediately rejects key elements
By Luke Baker
BRUSSELS, Dec 8 (Reuters) - EU leaders are committed to a new “fiscal compact” for the euro zone, including much tighter control of public finances and, in the longer term, could consider joint debt issuance, an early draft of conclusions at an EU summit said on Thursday.
Key elements were, however, immediately rejected by Germany.
“The stability and integrity of the Economic and Monetary Union and of the European Union as a whole require the swift and vigorous implementation of the measures already agreed as well as further qualitative moves towards a genuine ‘fiscal union’ in the Euro area,” said the draft obtained by Reuters.
The draft showed the euro zone agreed to bring forward the launch of its permanent bailout fund, the European Stability Mechanism, to July 2012, and give it a banking licence.
The draft also said that both the temporary bailout fund, the European Financial Stability Facility (EFSF) and the ESM, could run in parallel for a year from mid-2012.
The maximum lending capacity of the ESM, set at 500 billion euros, would not be diminished by the amount of money already spent by the EFSF, as was the initial plan, the draft said.
But Germany opposed proposals such as giving the ESM a banking licence, issuance of common euro zone debt and allowing the parallel functioning of the EFSF and ESM, a senior German source said.
A banking licence for the ESM would give the bailout fund access to European Central Bank liquidity lines, bolstering its ability to tackle the euro zone debt crisis. The draft conclusions also said the ESM should have the ability to directly recapitalise banks.
A euro zone official said earlier on Thursday that would help governments keep down deficits, which would not be inflated by the costs of recapitalising banks.
Euro zone leaders agreed earlier this year that the ESM would have paid-in capital of 80 billion euros and callable capital of 620 billion euros. They had decided that the paid-in capital would be provided over five years.
The draft showed that the leaders were now ready to pay up more quickly.
“During the phasing in of the paid-in capital, we stand ready to accelerate payments of capital in order to maintain a minimum 15 percent ratio between paid-in capital and the outstanding amount of ESM issuance,” the draft said.
To reassure investors that they will never again be asked to take voluntary losses on euro zone bonds, euro zone leaders declared that the ESM would strictly follow International Monetary Fund rules on private sector involvement in any potential debt restructuring.
They also “clearly reaffirm” that the Greek case was unique and exceptional.
The draft also said that voting in the ESM would be changed to include an emergency procedure, which would replace unanimous decisions with a qualified majority of 85 percent -- a change sought by France and Germany but opposed by Finland.
But this would happen only if the European Commission and the European Central Bank said that “an urgent decision related to financial assistance is needed to safeguard the financial and economic stability of the euro area”, the draft said.
Finally, euro zone leaders declared in the draft that they stand ready to provide to the IMF with additional money, with the amount left blank, in bilateral loans to ensure that the IMF has adequate resources to deal with the crisis.
“The Euro area is looking forward to parallel contributions from the international community,” the draft said.
A senior euro zone source said earlier the amount from the euro zone would be 150 billion euros and expectations of non-euro zone contributions were for around 50 billion.
“We agreed today on a new ‘fiscal compact’ and on significantly stronger coordination of economic policies in areas of common interest,” the draft declaration said.
The draft said this would entail establishing a new fiscal rule, under which government budgets would have to be balanced, which would mean that after stripping out one-off revenues and expenditures and the swings of the economic cycle, the structural deficit would not be higher than 0.5 percent of GDP.
Only countries with a debt/GDP ratio significantly below 60 percent could be allowed higher structural deficits.
The balanced budget rule would also have to be introduced into constitutions of euro zone countries and include automatic correction steps to bring the deficit down. The European Union’s highest court would have the right to verify that the rule is transposed in national legislation.
Euro zone countries which had budget deficits higher than the EU ceiling of three percent of GDP would have to submit to the European Commission and euro zone finance ministers a plan of structural reforms to durably reduce the shortfall.
The implementation of the plan would be monitored by the Commission and the ministers. Euro zone countries would also have to report their debt issuance plans ahead of time.
If a country breaches the three percent deficit limit, it would automatically face sanctions unless a qualified majority of euro zone finance ministers decide otherwise.
The draft said that leaders agreed to quickly give the European Commission new powers to monitor and assess budget drafts of euro zone countries with deficits above three percent.
“The Commission will in particular examine the key parameters of the draft budgetary plans and will, if needed, adopt an opinion on these plans,” the draft said.
“In case the Commission identifies particularly serious non-compliance with the Stability and Growth Pact (EU budget rules), it will request a revised draft budgetary plan,” the draft said.
The draft said that for the longer term, the euro zone would continue to work on deepening fiscal integration to better reflect the interdependence of euro zone countries.
“This will imply more intrusive control of the national budgetary stance by the EU, such as the ex ante approval of budgetary plans,” the draft said.
“In this context, the possibility of moving towards common debt issuance in the longer term and in a staged and criteria-based process, should be considered, once significant progress will have been made in reinforcing fiscal rules and discipline,” said the draft of the point that is being rejected by Germany.